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What is a short sale?

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What is a short sale

Investors are quite keen on making money quickly. One such method is to engage in a short sale. Though this strategy entails very high risk, we’ll look at how it works.

Sale without ownership

Selling a stock (or any other permitted financial asset) short means selling it without owning it. Though the concept may seem like an oxymoron, it is very real and a familiar idea for financial market participants. The primary reason behind this concept is the expectation that the price of the stock sold short will decline in the future, thus allowing the investor to buy the stock at a lower price and pocket the difference as profit.

How Does it Work?

An investor can sell a stock that he does not own by borrowing it from the broker or dealer through which the order is being executed. The understanding while conducting a short sale is that the investor will buy the stock back some time in the future. On their part, broker-dealers borrow the shares that are being short from custodian banks and fund management companies. The institutions lend shares in order to boost their revenue.

Example:

From an investor’s perspective, a short sale can be immensely beneficial as is illustrated below:

An investor short sells 100 shares of a company at £15 per share for a total of £1,500. If the price declines to £10, the investor can buy the same quantity of shares from the open market for £1,000 now and close his position, thereby pocketing £500 in the process. The actual profit will be a bit less because of the transaction costs and interest payments to the broker-dealer, but this is how short sales work.

Important Points

A short sale is always done on margin, meaning that one can put in a trade with only part of the value of the total. In case of a successful trade, the gains are leveraged due to this reason.

Margin account

In order to sell a stock short, an investor needs a margin account which is set up for him by the broker-dealer. Via this account, the investor is lent the cash to buy securities. Further, the broker-dealer also sets up purchase limits which restricts the value of trading that can take place on this account. A margin account is similar to a loan as periodic interest is payable to the broker for using the facility.

Since a short sale means selling an asset you don’t own, margin requirements are necessary as they act as a collateral and ensure that you will be able to buy back the sold shares (which you did not own). A margin account also allows the broker-dealer to sell your position on your behalf if it feels that you may not be able to buy the short sold stocks back.

Use caution

Short selling is a risky strategy. Unlike a buy and hold investor, who has time to see his strategy work, a short seller needs to be able to time the market with a certain level of accuracy in order to make money.

Risks Involved

But where short selling truly displays its risks are in terms of the potential loss to an investor. For a long-term investor, the worst that can happen is that a stock falls to zero. But even then his losses are limited to that amount. For an investor engaging in short selling, the losses are theoretically unlimited. This is so because the strategy bets on a stock declining. But if the price reverses course and starts rising, there is no ceiling beyond which it can’t rise. The more a stock rises, the more losses pile up on a short sale transaction.

Mitigation

One way to limit losses in a short sale is putting up stop loss orders which put price limits on the transaction and if the stock price rises beyond the pre-set level, the trade gets executed thus limiting the losses.

The crux of the short sale trade is that an investor should be aware that he is treading on extremely risky territory. While it can provide windfall rewards, it is fraught with risks, so professional guidance is necessary.

Investing

Equity Sharing – How do you choose the right plan for you?

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Equity Sharing – How do you choose the right plan for you? 1

By Ifty Nasir, co-founder and CEO of Vestd, the share scheme platform

In a survey of 500 SMEs, nearly half told us that the pandemic had made them re-evaluate how they operate. That’s not surprising as they’ve been faced with some unique challenges this year. Government support during the early stages of the pandemic, is now being extended till March 2021 but many businesses continue to struggle.

Making good people redundant improves cashflow in the short term but will have a long-term damaging impact on the business. At the same time, motivating employees, who are working remotely and worried for their jobs, is not easy.  It’s therefore not surprising that equity sharing, in the form of ‘share’ and ‘option’ schemes has become even more popular, with one in four SMEs now sharing equity with their employees and wider team

However, sharing equity can be a complex area and is easy to get it wrong. When it goes wrong there is a danger that you create tax issues (for you and your employees), de-motivate your team and even create future funding issues for the company. It is therefore really important that you choose the right scheme to set-up, but make sure you manage it too.

Below is a brief summary of the main schemes used by Start-ups and SMEs in the UK today. There are similar schemes and considerations globally.

  1. EMI Option Schemes – This is the most tax efficient scheme. Recipients pay just 10% Capital Gains Tax (CGT) on any value growth. The employer can also offset both the cost of the scheme and the value growth achieved by employees against its Corporation Tax  liability. You can also set conditions to control the release of equity, such as time served or performance. The recipient can’t simply walk away with shares, having delivered no value (which is one of the top concerns of many of the businesses and founders we talk to).  EMI Option Schemes are used by 41% of SMEs (who share equity) and, for good reason, are the most popular. Read our full guide to EMI for more information.
  2. Ordinary Shares  – This is the issuance of  full ordinary shares in the business, often without conditionality and with immediate effect. They are most often issued against cash investment. Once an employee (or any other recipient) has ordinary shares, you have no control over what happens to the shares thereafter. The individual can simply walk away with the shares, so we don’t normally recommend them for contribution that’s yet to be delivered. They’re also not tax efficient, as the recipient will have to pay tax at their marginal Income Tax (IT) rate, on any value the shares have at that point. These are used by 31% of SMEs.
  3. Growth Schemes  – These are a good option when the founders have built value into their company. The recipient only shares in the capital growth of the business from the date that the shares are issued.  You can give growth shares to anyone (not just employees) and you can attach additional conditions. These shares limit the risk of the recipient having to pay income tax on receipt of the equity, as they do not hold any value when they are issued but do pay CGT on the value growth at sale. Growth schemes are used by 31% of SMEs. Read the full details on Growth Shares here.
  4. Share Incentive Plan – SIP –  This is a tax efficient plan for all employees that gives companies the flexibility to tailor the plan to meet their needs.  Share Incentive Plans are used by 23% of SMEs.
  5. Unapproved Options – These are not very tax efficient as the recipient will pay IT on any value inherent in the share, above the exercise price, when they exercise the option. That said, they do provide more flexibility than the other options and are the easiest to set up as you don’t need HMRC approval. Unapproved Options are used by 22% of SMEs.

Is it worth the hassle? Earlier this year (i.e. during the first lockdown ) we carried out a piece of research with  business leaders,  exploring their attitude towards sharing equity with employees and wider team.  We spoke to over 500 owners of SMEs and identified six main business benefits to doing so:

  • Recruitment. You can combine salary with equity, to create compensation packages that match, or improve on, offers made by other more established companies with deeper pockets.
  • Retain the best talent. Share schemes are proven to increase employee retention and can help you reduce if not avoid hiring costs.
  • Increase productivity and performance. Studies have shown that employees who are also shareholders are more committed to their work and contribution because they feel directly vested in the growth in value of ‘their’ company.
  • Improve employee engagement and happiness. The more all employees feel included in the mission, direction, and success of the business, the more they’re motivated to contribute to the company.
  • Relieve cashflow pressure. Equity can be used to reduce the need for finance. Instead of paying people top rates and large bonuses, you can incentivise them via shares or options…giving them a share of the future they are helping to create.

Recruitment and retention are clearly the key drivers. It’s not too surprising to see why. Companies succeed or fail largely due to the quality of the people they manage to attract and retain. However, for smaller and start-up employers, attracting the right people can be difficult.  Good people are typically attracted to the idea of working for a house-hold name brand, they look for job security and are enticed by comprehensive employee benefit packages and high salaries that are unaffordable by most smaller companies. Employee share schemes are an effective way for smaller companies to compete in the job market against larger companies, with that potential for a massive/significant upside.

However, at this challenging time, it’s not all about money, keeping people focussed and motivated during the pandemic is at the top of most employers’ worry list.  If you choose the right scheme, equity sharing encourages employees to align their motivations to that of the long-term success of the business, over the immediate or short-term gains. And, right now, that is perhaps worth more than anything.

If you’d like to get into the detail then check out our guide to employee share schemes.

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Millennials driving high net worth parents and grandparents in a shift to sustainable investing

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Millennials driving high net worth parents and grandparents in a shift to sustainable investing 2
  • Seven in 10 among older wealthy generations say the millennial generation is leading their family towards more sustainable investing
  • Four in five of allgenerations of high net worth family members indicate that responsible investing is important to them
  • Four in five wealthy families have already changed their investments to express more of their beliefs in social and environmental responsibility
  • Whilst outlook on responsible investing is shared, three in five say that different appetites for risk between generations have influenced financial and wealth transfer planning

A new research series from Barclays Private Bank on the intergenerational transfer of wealth shows that ESG investing has been brought into wealthy families’ consideration by the younger generations. This has led to increasing family allocations to sustainable assets and is acting as a common ground for the different generations in financial planning, despite competing priorities and different views towards risk.

Barclays Private Bank’s Smarter Succession: The Challenges and Opportunities of Intergenerational Wealth Transfer research, undertaken by global intelligence business Savanta, identified that two thirds (68 per cent) of older HNW individuals say that their children have been leading the family on sustainable and responsible investment matters.

As a result, sustainable investing is now resonating with more high net worth (HNW) individuals of all ages and generations, uniting families around shared goals of investment responsibly and making financial returns. One in ten (11 per cent) of all generations say that having a positive environmental impact is a top personal aim, and over a third (37 per cent) strongly agree that responsible investing is now important to them, demonstrating the potential of ESG issues to align with overall wealth objectives across generations and bring families together around securing their financial future.

Furthermore, for around four in five of each of the studied age groups, investing responsibly is important to them to some extent, with 81 per cent of under 40 year-olds, 77 per cent of 41 to 60 year-olds and 86 per cent of over 60 year-olds agreeing.

Changing family attitudes are shifting portfolio allocations

Changing attitudes have led to a substantial shift in the way HNW families are investing, with almost four in five (78 per cent) expressing their views on social and environmental responsibility in their investments.

This shift is highest in the UK (83 per cent) and the Middle East (82 per cent). India is lower in comparison, but still with 62 per cent investing with social and environmental considerations, this indicates that there is a significant international movement towards a more sustainable investment approach.

For those who aren’t already investing this way, 22 per cent of the elder generations would like to find out more about their sustainable investment options, and 19 per cent are interested in understanding more about investing specifically for positive social and environmental impact, suggesting that the trend is likely to continue to grow.

Finding sustainable common ground in succession planning

Sustainable investing may provide a place for common ground between the generations, where issues such as risk appetite continue to bring conflicting views from different generations. Sixty-one per cent of family members cite different risk appetites between the generations as affecting the direction they collectively take on investments.

High net worth families say that broadly different life values (57 per cent), the impact of social media (47 per cent) and differing educational backgrounds (40 per cent) are also areas that are contributing to different outlooks and priorities between the generations, and in turn affect financial and succession planning.

Half (50 per cent) of this millennial generation say that these factors contribute to them feeling that their overall financial aims and objectives are not understood by the rest of the family.

Older generations passion for philanthropy

Philanthropy is another area where the younger generations are taking a role in using family wealth to positively affect the world, but in contrast to sustainable investing, charitable giving tends to be led by the older generation, showing that each age group is finding different ways to give back to society.

Over 60 year-olds more commonly say that philanthropy is their passion (38 per cent) than the under 40 year-olds (20 per cent), but in the majority of families (74 per cent), the older generation hands responsibility for managing philanthropic activity to their children.

Damian Payiatakis, Head of Sustainable and Impact Investing, Barclays Private Bank comments:

“Our research shows how the younger generations, who have been engaged longer with sustainable investing, are providing a vocal impetus within their families to shift the perspectives of older generations.

“As well, most of the narrative around sustainable investing focuses on the benefits for your portfolio alongside people and planet. Now, we can see its potential benefits for aligning your family around shared values and supporting intergenerational wealth transfer.

“With the heads of the families thinking about succession planning and investing beyond their personal lifespan, our conversations has extended to include how sustainable investing can secure their children’s future, their readiness to inherit family wealth, and a common ground for family discussions around wealth.”

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Is now a good time to consider art as an investment?

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Is now a good time to consider art as an investment? 3

By Anita Choudhrie, Founder of Stellar International Art Foundation

Back in April, as Covid-19 began to have a significant impact on museums and galleries across the world, the Association of Art Museum Directors described it as a “crisis without precedent”. Now, nearly seven months on, the re-introduction of lockdown measures and the uncertainty around the looming Brexit deadline continue to undermine the art market.

Many small and medium sized galleries were already facing an uncertain future before the pandemic. Now, this has only been exasperated, with auction sales postponed, art fairs cancelled and galleries having to shut their doors for the second time this year. According to a survey by Art Newspaper, UK galleries are expecting a shocking 79 per cent fall in revenue in 2020.

With such market uncertainty, it is understandable that collectors may be feeling hesitant about whether now is a wise time to be investing in art. People are generally more cautious with their money during a period of economic uncertainty, including with their spending and investments. Naturally, this has a substantial impact on the entire art ecosystem, affecting artists and galleries, as well as the huge number of other people who make a living from the community. Moreover, during Covid-19, social distancing requirements have made it near impossible for collectors to physically inspect and transport purchases.

Art market resilience

Yet despite this hesitation, people are in fact still purchasing new works, just in a more considered and calculated manner.  This is unsurprising when you consider the resilience of the art industry. In recent history there have been many other periods of precarity, including recessions, previous health pandemics and unpredicted events which have sent shockwaves through the world…but the art industry has always recovered. According to a Statista report, in 2019 the global art industry was valued at $67 billion, a stark contrast to the art market’s $39 billion evaluation in 2008 and 40 percent decline between the recession years of 2007 and 2009. It cannot be denied that COVID-19 is an unprecedented event which will have rippling effects for years to come, but it will do collectors well to remember that as we have seen before, normality will eventually resume. Whether it takes a couple of months, or even a year, the markets will recover – and once shops and restaurants re-open, holidays resume and employees return to offices, the art markets will assertively bounce back once again.

Considering art as an investment opportunity

Whilst investing in art may seem like a daunting prospect and an unnecessary expense during the middle of a global pandemic, now is a crucial time for collectors to be supporting the delicate art ecosystem wherever possible. Despite the precarious situation, artists have proven time and time again that their work can hold value during periods of economic upheaval, so there may still be wise investment opportunities to explore. For example, over the past five years, some of the most collectable contemporary art pieces have increased in value by over 160 percent. Over the past year, this same index has risen in value by nearly 5 percent, demonstrating how resilient the market can be.

Anita Choudhrie

Anita Choudhrie

In addition to this, many auction houses and galleries have set up charity sales, offering collectors an opportunity to purchase credible art at amazing prices, whilst doing their bit to keep the market afloat. Therefore, along with providing collectors with an opportunity to pick up some fantastic bargains, the pandemic is also helping to open up the art world to new, first time buyers, encouraging younger generations to become collectors as well.

The digital boom

Ultimately, the pandemic may be wreaking havoc on the world, but it is also providing the long-needed incentive for the art industry to fully embrace change. Art works have been available through multiple online platforms for years, however, the scale of investment into digital channels has rapidly expanded in recent months. For example, the renowned Galerie Thaddaeus Ropac invested extensively in state-of-the-art technology to facilitate virtual visits, starting with a walk-through of the Daniel Richter show in its Salzburg gallery.

Additionally, the organisers of Art Basel created an online viewing room dedicated exclusively to artwork produced this year. Not only did this decision give some of this century’s most overlooked artists a chance to shine in the digital spotlight, but it also opened up the exhibition to a much broader audience than ever before.

Although the pandemic has forced the industry’s hand, total online sales have risen from a 10 percent share of the business market in 2019 to over 35 percent in the first half of 2020. The importance of this shift in making art more accessible to everyone and in turn, supporting the industry to stay afloat, cannot be overlooked. This online market growth also demonstrates how there is still significant demand among buyers, and therefore, that the art market isn’t going anywhere anytime soon.

Looking ahead

Ultimately, with the global economy currently disrupted and with no real indication of when ‘normality’ will resume, it is understandable that collectors may be treading carefully with their next purchase. Yet as we know, art has long proven to be a stable investment, often outperforming other asset classes and weathering the most difficult of global financial storms. Of course, every collector’s situation is different, but there are certainly great deals to be had across the entire spectrum of the art market; whether you are in the fortunate position to invest in fine art, or are looking to make your first purchase from the emerging category.

The Stellar International Art Foundation:

Established in 2008, The Collection has become internationally renowned for its content, coverage and activities around the globe and is a particular champion of female artists and feminist art. Currently the foundation comprises over 600 works dating from the late 19th Century to the present day, including international artists and ranging from sculptures to paintings. It distinguishes on individual talent rather than regions and gives an insight into the cultural viewpoint of individuals with diverse understandings of the world.

For more information, please visit: https://sia.foundation/

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